By Hal Craig, founder, Trout Creek Consulting, LLC
The failure to supply (FtS) provision in a drug product or drug substance supply agreement – typically ranging from a paragraph to a couple of pages – can be the most hard fought over “what if” in the agreement and, after price and volume, the section of an agreement with a high potential to fracture a customer-supplier relationship. Part 1 of this two-part series addressed general industry and supplier perspectives that can complicate FtS negotiations. This article addresses the drug marketer’s perspective and provides a path forward to negotiate a mutually agreeable solution.
Table 1 summarizes the complicating issues that can make compromise difficult without trust.
Table 1: FtS Provision Complicating Issues
Issues That Complicate FtS Negotiations From A Drug Marketer’s Perspective
The Drug IS The Company
For many development and early commercial-stage drug marketers, their lead drug may be the only product the company has or the only product likely to reach market for a couple of years or more. The drug marketer’s financial viability and its potential to be acquired, out-license, or enter into an IPO may depend on the commercial success of its lead drug. Furthermore, the early commercial-stage drug marketer will likely have a sole-sourced supply chain. Hence, the drug marketer wants contractual assurances that the CMO(s) and other suppliers are committed to delivering drug product on schedule, in specification, validated, and produced per cGMP and the quality agreement. In short, the drug marketer wants to be a priority for its supply chain partners. If profitable revenue is the carrot to suppliers, then the FtS provision is the stick.
Forecasts of development and early commercial-stage drug marketers are heavily impacted by both the funding and regulatory environments that the company faces. This impacts both the pace of activity and the ability to make financial commitments to inventory, capacity, people, and other items. Development and early commercial-stage drug marketers also desire supply agreements that don’t limit future deals — acquisition and licensing — by imposing too many manufacturing and financial restrictions on potential acquirers and licensees. Although having said this, there are acquirers and licensees who prefer that the drug developer has contracted the supply chain before the acquisition or license is done. Interestingly, some suppliers may be concerned about setting an FtS provision precedent with original drug marketer A that could haunt them in the future if another of their customers, drug marketer B, buys A and then presses to have the “best” FtS provision harmonized across the products made for A and B.
Different drug products face different competitive dynamics and cost pressures. Novel biologic and small molecule therapies that represent a significant improvement in the standard of care may give the drug marketer different economics than a generic or OTC drug product would. The drug marketer doesn’t want to absorb additional costs associated with an FtS for reasons that are within the supplier’s control. While not strictly related to FtS, drug marketers want to see improved economics in their supply chain.
Is There A Less Stressful Way To Arrive At A “Failure to Supply” Provision?
Of course there is!The path forward starts with all parties recognizing six key points:
What Might An FtS Provision Look Like?
The specifics of the FtS provision will vary with each drug product because the Definitions, Causality, Scale, and Second Supplier Qualification sections can vary based on the raw materials, technology, shelf life, regulations, supplier location, and other factors associated with each drug product.However, keeping the six key points in mind, the FtS provision might cover the following:
A successful failure to supply provision requires two things: (1) thinking through ahead of time what the drug marketer and supplier will do if there is an FtS to make it easier to work through the FtS; and (2) highlighting what the drug marketer and supplier should each do to avoid an FtS. The drug marketer should regularly update its forecast and place orders per the supply agreement. The supplier should manage its supply chain, resources, and production schedule to meet supply commitments. Both parties should communicate with each other regularly and consistently. And remember, the goal is making sure patients receive life-improving therapies when they need them.
About the Author
Hal Craig is the founder of Trout Creek Consulting, LLC, a strategy and life science supply chain consultancy focused on solving CMC, outsourcing, strategy, and technical challenges. Clients include venture-backed, family-owned, private equity-owned, and publicly traded companies. Craig serves on the Physical Sciences Investment Advisory Committee of Ben Franklin Technology Partners of Southeastern Pennsylvania. He has a BSChE from the University of California, Berkeley and an MBA from the University of Michigan. He can be reached at email@example.com.
Disclaimer: This article is intended to provide general information on a particular subject or subjects and is not an exhaustive treatment of such subjects. Accordingly, this article does not constitute legal, accounting, tax, investment, consulting, or other professional advice or services. Before making any decision or taking any action that might affect your personal finances or business, you should consult a qualified professional adviser. In no event will Trout Creek Consulting, LLC or the author be held liable in any way to the reader or anyone else for any decision or action taken based on this information, or for any direct, indirect, consequential, special, or other damages claimed by the reader or anyone else based on this information.